The current rotation back into tech and the AI trade is weak. Watching the semiconductor ETF (SMH), the buy-side activity coming back into chips is meager. A strong "rip your face off" rally is needed, and it is not showing up. Without it, the market may fall right back into more selling in the coming days.
Trade 1: XLF (Financial Sector ETF) - Bearish
I am fading the XLF with a bearish trade. The XLF rallied from 53 to 56 with a nice bid back. The problem hidden by looking at the ETF alone: the big banks - JPMorgan (JPM), Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), Morgan Stanley (MS) - have not rallied. What is carrying the whole financial sector is Berkshire Hathaway (BRK), the primary holding of the XLF. That split between the banks and Berkshire makes a good setup to fade.
The trade: a defined-risk options spread using the November 20th expiration. Buy a $2-wide put spread - buy the 56.50 puts, sell the 54.50 puts - for a 75-cent debit. This sits right on top of where the ETF trades, so only a small downside move is needed. Weak bank performance versus Berkshire is the reason to fade.
Technical counterpoint: The concentration in Berkshire makes this hard, because Berkshire is now in a basing and breakout formation that has been building for a year and a half. On the one-year daily chart, the XLF holds key moving averages, especially the 200-day. Last November it pulled back and consolidated at the 200-day before moving higher. It later broke through the 20, 50, and 200-day averages and fell, with buyers stepping in at the $48 level on March 30th. That low formed a bullish harami candle - an outsized bearish candle followed by a bullish inside candle - which marked the capitulation low. Price retested the 20-day, could not break above, consolidated, then broke out. It flattened and rolled over from August into September, pulled back, and the 200-day is again acting as support. The 20-day flipped from resistance to support. Next resistance is the 50-day; a pullback and retest of the 20-day could lead back to the 57.12 to 58.50 range. RSI is making higher lows. MACD is bullish, 12 EMA above 26 EMA. The daily chart looks mostly bullish over the next couple of weeks.
On the weekly chart, a trend line off the lows has been tested, with the 50-week moving average in confluence with it; price is now testing the 20-week average. It is still making higher lows and should make higher highs, so the trajectory is higher. A one to two week near-term pullback is possible, but over two to three months it is hard to fade. Year to date the XLF is nearly flat, up about 2%.
Trade 2: Toll Brothers (TOL) - Bearish
Housing is not warm and fuzzy. Toll Brothers is not entry-level housing, but affordability is clearly a problem. Interest rates are higher, and there is a hawkish Fed. One factor not being priced in: a possible yield curve inversion, which would signal a recession. The rate backdrop is bad for homebuilders. Toll Brothers is already in a degree of downtrend.
This trade gets the gift of duration, going out to the January 15th expiration, because the market should keep degrading and the Fed should stay hawkish for now. The trade is a fairly large spread needing a big move: buy the 125 puts, sell the 115 puts, done for a $260 debit. It is a $10-wide spread; risking the full $260 needs the stock at 115 or under by January expiration. The stock currently trades at 135.67, with an earnings event coming up. This trade is based more on the fundamentals of the economy than on the technicals. Yesterday's housing data confirmed a deep freeze in the market.
Technical counterpoint: Toll Brothers is consolidating and trying to use the 20-day moving average as resistance; it broke above it today, which may or may not hold. A secondary trend line from the highs aligns with the volume point of control around $136-$137. The hard part: over the last year the stock has not traded below 130 for more than four sessions in a row before recovering. The 130 to 125 zone is the buy area where people step in. RSI shows lower highs but higher lows in the near term, a good sign. MACD is in a bullish formation, still below the zero line, with the 12 EMA above the 26 EMA, meaning short-term momentum has edged higher. The weekly chart is weaker: the stock has traded in a consolidation range since November 2024 and is nearing the bottom of that range. The volume profile shows 136 as the fulcrum where sellers are being digested. A break down to around 127 is where buyers have stepped in; a move up targets 167. Weekly RSI makes lower highs (bearish), MACD is bearish with the 12 EMA below the 26 EMA and below zero.
Rebuttal: I agree on the 130 level, but I am looking for 130 to break and act as the key trigger that causes a downside spiral. As far back as data goes, real estate has never seen buyers on strike like now. A rising rate environment and a possible yield curve inversion will be hard on homebuilders. Yesterday's data showed some of the lowest readings on record for builder sentiment, sales, and starts, and construction costs keep rising.
Trade 3: Alibaba (BABA) - Bearish
Alibaba is in a cyclical downtrend and the chart is hideous. Sell-side activity is bleeding through day to day. The stock is down more than 4% today after a broad sell-off this week. Going with the trend here, which is not a usual move unless the conviction is strong. The business is clearly in decline. The sell-off across semiconductors and Alibaba is a negative for AI; there is no bounce in Chinese AI specifically.
The trade: December 18th expiration, buy the 100 put, sell the 90 put, a $10-wide put spread for a $2.80 debit. The chart gets even worse on longer time frames.
Technical counterpoint: The daily chart looks bad - lower highs, breaking below the 20-day, 50-day, and 200-day moving averages. If firm support holds above the prior low around 91-92, the stock would be making a higher low, but that cannot be assumed yet. There is a falling wedge pattern, and price is at wedge support; a break lower would roll it over. Daily RSI makes lower highs, MACD is bearish with the 12 EMA below the 26 EMA.
The weekly chart gives some optimism. Over the last three years Alibaba has leveraged the 200-week moving average (in red) as a critical level. In October 2024 it acted as resistance almost exactly, price failed back to the 50-week average, retested the 200-week, broke above, retested, and moved higher. Lower highs followed after hitting the 192 level. In June and July of this year it tested the 200-week average and buyers stepped in; it is testing it again. Holding here forms a higher low and raises confidence for a break above the 20-week and 50-week averages. Weekly RSI is not great but not breaking down further; MACD is flattening with a bullish cross back in July. Longer-term charts give a stronger signal for the longer-term trend. The 200-week average, having flipped from resistance to support, could hold, and if it does, an aggressive upside move could follow. Daily breaking down, weekly could bounce.
Rebuttal: Sell-side activity is everywhere in anything AI has touched. Semiconductors have not bounced, and even a short-duration rally is still a big fade. Alibaba sits in the same category as semiconductors. The South Korean market (EWY) bounce has also been meager. Any bounce here should be short-term and fadeable, which is the Alibaba trade. Alibaba is down about 4% at 104.33.
